Investor sentiment has 180’d in less than 2 months on this name. Yet as we go through the print, the 10-K, and the model, beyond a 1 quarter working capital improvement and Champion staving off a slowdown in 4Q, we think little has changed as it relates to HBI's inability to protect cash flow long term. There are several themes that came out of the 10K that support this premise, as well as our TAIL earnings estimates, which remain 40% below consensus.
Here are our key callouts from the 10-K (dollar values in quotes from 10-K are in thousands):
Brand Investment
- 2018 saw new lows for investment in the brands as Ad expense was down 3%, and R&D was down 9% despite an acquisition and organic revenue growth.
- We wonder how much of advertising spend has shifted to supporting Champion growth and away from the core.
- This lack of investment strengthens our view of organic growth pressure (ex Champion).
Bras N Things
- The operating margin of Bras N Things was 22.5% in 2018… how does that go anywhere but down? LB was 18% EBIT margin at the peak.
- “Bras N Things contributed net revenues of $122,399 and pretax earnings of $27,514 (excluding acquisition and integration related charges of approximately $6,948) since the date of acquisition.”
- Inventory at deal closing was noted at $9.6mm, for an intimates retailer doing $122mm in sales.
- Is it turning at 13x? A 22.5% margin, turning inventory 13x. Is this the best retailer in history?
- These numbers don’t make much sense to us.
Country/Region Exposure
- HBI changed its disclosure from revenue/assets by country, to region.
- Europe is 14.5% of revenue.
- APAC is 16.6%. Japan is ~4% and the remainder is mainly Australia/NZ.
- We're bearish on both Europe and Australia from a macro perspective.
WMT & TGT Revenue
- Revenue at WMT down 6%, TGT down 3%
- Men’s underwear was cited as strong in 2018, while other parts of basics were weak, and intimates was down 10%. We think the new GIL men’s underwear private label program at WMT is a risk in 2019 to an HBI category that had shown “strength” in 2018.
- HBI stopped disclosing the portion of Innerwear and Activewear that TGT/WMT make up, rather giving their portion of total revenue alone.
Inventory
- HBI is still seeing finished goods outpace total inventory as the company pulls cash out of raw materials and work in process.
- 4Q18 Innerwear sales result (and guide) implies a timing shift of shipments helping 4Q (-7% in 3Q, to flat 4Q, to -4% 1QE). That may have been a help of $20-$40mm in year end inventory and CFFO.
New Tariff Risk Disclosure
- “It is possible that other forms of trade restriction, including tariffs, quotas and customs restrictions, will be put into place in the United States or in countries from which we source our materials or finished products. We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type, or effect of any such restrictions.”
Leases
- New Lease accounting will optically add another half a billion to debt.
- “The Company expects this adoption to result in material increases in assets between $475,000 and $525,000 and liabilities between $500,000 and $550,000 in its consolidated balance sheet, as well as enhanced disclosure regarding the Company’s lease obligations”
